Last week, T-Mobile (NASDAQ:TMUS) CFO Braxton Carter and CTO Neville Ray sat down at the Citi 2015 Internet, Media & Telecommunications conference. They talked about what investors can expect from the company in 2015 and how its service stacks up against that of AT&T (NYSE:T)and Verizon (NYSE:VZ).
Here are a couple of the biggest takeaways from their sit-down.
T-Mobile is thriving in the current wireless service environment
"There will be no normal. This is the new normal," said Carter.
In 2014, T-Mobile added an estimated 8.3 million net new customers, bringing its total up to 55 million. A large portion of those customers are valuable postpaid smartphone subscribers. Of the 2.1 million customers T-Mobile added last quarter, 1 million were postpaid smartphone users.
Carter was keen to point out that it's gaining these customers at the expense of AT&T and Verizon, which have told shareholders that their financial pressures will improve when market conditions return to normal. Industry churn increased in 2014 due to T-Mobile's Un-Carrier promotions, according to Carter, and that's great for T-Mobile.
Carter also noted, "when our competitors copy us, our differentiation improves." While that statement seems paradoxical, the CFO provided an excellent recent example. Last month, T-Mobile introduced Data Stash, which allows subscribers to roll over their data for up to 12 months. AT&T copied the promotion last week, offering subscribers the ability to roll over data for just one additional month. AT&T is shining a light on T-Mobile's latest promotion for them.
T-Mobile also wants wireless subscribers to use data, and CTO Neville Ray feels it has plenty of capacity to support high-data-consuming customers. T-Mobile owns more spectrum per customer than AT&T and Verizon, so there's room for increased usage there. It has the fastest LTE network in the country, and has introduced wideband LTE -- 30 MHz to 40 MHz of spectrum providing speeds up to 100 Mbps -- in 121 markets so far.
And T-Mobile isn't cutting prices to attract more customers. While it offers lower prices than AT&T and Verizon, T-Mobile's average billing per user reached an all-time high in the third quarter of last year. Still, the costs involved with building out an LTE network -- which Ray said the company plans to extend to 300 million points of presence (PoPs) this year -- have weighed heavily on T-Mobile's cash flow.
But there's good news.
T-Mobile plans to be cash flow positive in 2015
"We absolutely intend on having positive free cash flow in 2015," said Carter.
Verizon and AT&T believe that T-Mobile will be unable to compete with them because it can't commit as much to capital expenditures. Indeed, over the last 12 months, T-Mobile's capex has totaled $6.6 billion, compared to $22.2 billion from AT&T and $17.9 billion from Verizon.
What's more, that spending is likely unsustainable for T-Mobile, which has ramped up spending as it rolls out its LTE network. In the trailing 12 months, T-Mobile's free cash flow has declined to negative $2.8 billion.
Capital expenditures should decline this year, but that doesn't mean T-Mobile won't stay competitive with AT&T and Verizon. While the two larger players are spending billions of dollars on the current AWS-3 mid-band spectrum auction, T-Mobile is able to sit patiently with its huge portfolio of mid-band data licenses.
The carrier's biggest network-related goal for 2015 is footprint expansion, which is relatively inexpensive compared to adding network capacity like AT&T and Verizon are doing. By the end of the year, Ray believes T-Mobile's network will cover as large a geographical footprint as those of AT&T and Verizon.
T-Mobile will benefit tremendously from moving its customers onto its LTE network, and it plans to do so as quickly as possible. That will allow it to refarm its old 2G spectrum, redeploy its Metro PCS spectrum, and better utilize the 700 MHz spectrum licenses it acquired from Verizon last year.
The amount of capacity available to T-Mobile will allow it to lower its capital expenses, and Carter believes that will allow it to turn free cash flow positive this year.
Keeping up momentum in 2015
There's no denying T-Mobile had an excellent 2014. The company has created excellent momentum, and it might pay off sooner than expected with cash flow turning positive before the year ends.
Shares of T-Mobile didn't fare nearly as well, likely due to the pressure its promotions and ambitious LTE network rollout put on profits and cash flow. With the network-building expenses largely in the rearview mirror for now, both profits and cash flow ought to bounce back as T-Mobile continues to grab more of Verizon's and AT&T's most valuable customers.